From the October 2012 issue of Investment Advisor • Subscribe!

The Cost of Management: Making More From Less

In advisory businesses, traditional hands-on management often creates more problems than it solves.

In my white paper “P4: Building Great Businesses by Creating Great Employees” (see “Let Go to Grow,” Investment Advisor, November 2011), I suggest that traditional business management strategies don’t work very well for independent advisory practices (and probably not for other small businesses, either).

In part, that’s because most owner-advisors aren’t trained to be business managers. But also, without the vast resources of large corporations that enable them to overcome individual deficiencies with sheer economies of scale, the success of small businesses depends far more on individual initiative and teamwork that focuses their limited resources to maximum advantage. In this smaller business environment, I’ve found traditional management techniques are not only far less effective, but they can actually have a negative impact on the success of a firm.

Here’s how London Business School professor and author Gary Hamel described the problem with management in his December 2011 Harvard Business Review blog:

“Hubris, myopia and naïveté can lead to bad judgment at any level, but the danger is greatest when the decision maker’s power is, for all purposes, uncontestable. Give someone monarch-like authority, and sooner or later there will be a royal screw-up,” Hamel wrote.

He added: “In their eagerness to exercise authority, managers often impede, rather than expedite, decision making.”

In advisory firms, I’ve had to deal with numerous problems caused by owners who want to manage—or micro-manage—their employees: that is, to closely monitor the way in which each employee works, to make every decision regardless of magnitude, to generate every new idea, and to initiate every new project or job. The consequences are many and destructive.

To start with, “hands-on management” sends the wrong message: Instead of training employees to think for themselves and figure out how to use their own skills and knowledge to achieve the desired result, it focuses on the manager and how she or he would do the job. This greatly restricts employees’ willingness to exercise initiative or use their own abilities or judgment. The result is far less ownership of the result and a tendency to let the manager “do it for them.”

What’s more, too much managerial input and oversight often reduces employees’ ability and willingness to work as a team by dampening both their individual creativity and a shared drive to do what needs to be done. By limiting employees’ vision of success—both for themselves and for the firm—over-managers find they increasingly have to provide the driving force behind every aspect of the business. This is a draining and time-consuming role, especially in addition to being the lead advisor, rainmaker and business owner, and is a major factor in the high burnout rate among independent owner/advisors.

Over-management also demotivates employees, dramatically reducing productivity. By focusing on how employees do their jobs rather than on the results, the manager’s approval is required at every step of a job or project, causing unnecessary delays that depend on the manager’s availability and increase employee stress levels.

Taken together, the effect of hands-on management is to create firms in which the owner/advisor has to be in almost constant contact with all or most of the employees, providing direction and feedback at every stage of each employee’s current project or job. It’s a business in which employees await direction before undertaking any new task, attempting to solve any new problem or fulfilling any client request; a firm in which employees feel little or no sense of ownership, of team work, of shared vision or shared success.

It’s not a pretty picture, to be sure. To bring it fully into focus, we undertook research to demonstrate the actual cost of hands-on management to owner-advisors. In the clinical studies of the advisory firms with which we work, which formed the basis of our P4 white paper, we compared firms that use traditional management strategies and techniques with those that buy into our more employee-centered strategies. These “P4” principles are designed to train, motivate, incentivize and equip employees to manage themselves and each other, and to think and act creatively and collectively to achieve the goals of their firm. In theory, this frees up owner-advisors to focus on serving clients, growing their firms and achieving their goals—both business and personal.

How does it work in actual practice? Consider this comparison: At present, our consulting clients are comprised of equal numbers of P4 firms and traditional firms (despite our encouragement to adopt P4 principles), with both groups averaging close to $1 million in annual revenues ($1.2 million for the P4s versus $1 million for the traditionals). In our traditional firms, owner-advisors take home total compensation, including salary, bonus and owner’s income, of $288,813 annually, roughly a 30% margin. To earn it, they work on average 48 weeks a year (with four weeks of vacation), putting in 54 hours per working week. That works out to 2,592 working hours per year, at an income of $111.42 per hour.

In contrast, the owner-advisors at our employee-centered P4 firms earn on average a total of $437,719 per year (a 36.5% margin and 51.6% more than their traditionally minded peers). To earn it, they take nine weeks off each year and work an average of 31 hours during the remaining 43 working weeks. That means they work an average of 1,333 hours per year, for an average wage of $328.37 per hour—some three times as much as the owners of traditionally managed firms.

To get those kinds of results, we start by teaching owner-advisors to stop doing virtually everything that traditional business managers are trained to do: hiring blue-chip talent, putting new employees to work as quickly as possible, doing regular performance reviews, paying discretionary bonuses, forcing employees to keep regular hours, maximizing employee time in the office, minimizing overhead and focusing on the bottom line.

Instead, we get owner-advisors to think about the top line and growing their firms to their ideal size to reach their financial and personal goals. We ask them to focus their efforts on creating a team that will work together to create at that firm. They communicate to each employee how the firm plays a valuable role in their community and the lives of its clients. They educate employees on what they need to excel at their jobs and encourage them to succeed by doing their jobs their way, using their strengths and abilities. Owner-advisors encourage their employees to make their jobs fit their lifestyles and family life, and provide the tools for them to excel at their jobs. Finally, owner-advisors must let employees share in the success of the firm they’ve helped to create.

By teaching firm owners to think of themselves more as a coach and less as a boss, and to provide their employees with the tools and support they need to succeed at their jobs, we’ve found they spend less time “managing” and more time working with clients, growing their business or simply enjoying their success—and they have substantially more success to enjoy. Their work seems less like work, and the office becomes a fun place to go. In fact, one of the biggest problems that P4 owners have is convincing their employees (and themselves) to spend enough time at home. Which, considering the traditional alternatives, is a wonderful problem to have.       

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